Dynegy-El Paso Contracts Get FERC Nod
Dynegy Corp., formerly Natural Gas Clearinghouse, and El Paso
Natural Gas won a clear victory last week over competing shippers
and the California Public Utilities Commission (CPUC) when FERC
ratified with only minor changes the three contracts signed by
Dynegy to lease 1.3 Bcf/d of capacity on El Paso.
The rehearing order issued by the Federal Energy Regulatory
Commission shot down claims by gas producers, marketers and the
CPUC that the contracts were anticompetitive and unduly
discriminatory, giving Dynegy control of a large portion of El Paso
firm capacity and resulting in higher California border prices.
Specifically, the producers and others took issue with an
interruptible (IT) revenue crediting mechanism in the contracts,
which they contend significantly reduced competition between El
Paso's IT and the firm capacity held by Dynegy. A state source
doubted FERC's ruling would be the last word on the subject. The
Federal Trade Commission reportedly is eyeing the contracts, too.
The fact that the contracts make use of the large amount of
unsubscribed capacity on El Paso's system and that the rates being
charged to shippers are "well below" El Paso's maximum rate ceiling
"outweigh any concerns that the transaction is unduly
discriminatory or anticompetitive," the order said [RP97-287-010].
"The Commission, therefore, concludes that the [contracts are] not
unduly discriminatory or anticompetitive."
The protesters argued that the contracts restrained competition
in the secondary market and, as such, violated antitrust laws and
should be considered within that context. The Commission denied
their request, saying it was "not charged with administering or
enforcing the antitrust laws." It conceded the protesters'
competitive concerns had some merit within the framework of Order
636. But the key question was whether those concerns "[rose] to the
level of unduly discriminatory behavior," the order noted.
In the end, the Commission concluded that the Dynegy-El Paso
transaction, specifically the IT crediting provision, "while it is
anticompetitive because it reduces El Paso's incentives to compete,
it does not result in an unduly discriminatory situation in the gas
transportation market to California." The IT crediting provision at
issue has been the subject of controversy because it calls for El
Paso to adjust downward Dynegy's $70-million payment for the 1.3
Bcf/d of capacity if the pipeline should exceed its 1997 level of
monthly IT volume sales over the next two years. Producers and
marketers blamed the IT crediting mechanism for El Paso's decision
to halt discounting of westbound IT capacity earlier this year.
The Commission conceded the IT crediting mechanism "reduces El
Paso's incentives to discount its IT and to compete as a gas
transporter" with Dynegy. However, without it, Dynegy would never
have agreed to enter into the contracts with El Paso, and the
pipeline's situation would be "materially worse."
Moreover, FERC pointed out that while transportation rates from
the San Juan and Permian basins to California have risen since Jan.
1, 1998, when the Dynegy-El Paso contracts became effective, they
are still "well below" the maximum rates on both El Paso and
Transwestern Pipeline. In addition, the California gas sales market
is forecasted to show "little or no growth" while the contracts are
in effect, making it "unlikely that the market for firm
transportation will be so constrained as a result of either [the
contracts or the IT revenue crediting mechanism] that undue
discrimination will result during the balance of the two-year
contract terms," the order noted.
No Demonstrated Injury
Given these factors and the fact that El Paso is not required to
offer capacity at less than its maximum rate, protesters have "no
grounds to complain" that elements of the contracts are unduly
discriminatory or inconsistent with the public interest, FERC said.
"The protesters have not demonstrated injury to themselves as
[Dynegy's] competitors or [to] the public that warrants relief
under the just and reasonable standard..."
The Commission, however, ordered El Paso and Dynegy to amend the
contracts so that the IT crediting mechanism "will never apply in
any month in which [Dynegy] flows sufficient volumes to meet its
monthly minimum pay obligation under the contracts at issue."
The CPUC and Pacific Gas and Electric (PG&E) won a mixed
decision on the recallability of the Block II portion (644 MMcf/d)
of the capacity that El Paso sold to Dynegy. The two argued that
the awarding of the Block II capacity violated the terms of El
Paso's 1996 settlement with its customers. As part of the
agreement, PG&E paid $58 million to preserve access for northern
California customers to San Juan Basin gas.
The Commission ruled that shippers located in northern
California couldn't recall the Block II capacity simply because it
wasn't being used by Dynegy. "The fact that [Dynegy] may at times
not actually use the capacity does not diminish the rights of other
shippers under the 1996 settlement; this occurred because they did
not acquire the Block II capacity when it was available," the
Commission order said. However, it added the transportation
capacity would become recallable in the event that Dynegy used it
to serve customers outside of PG&E's service territory.
FERC said it wanted the recall provisions associated with the
Block II capacity to be implemented in a fair manner to both Dynegy
and the recalling shipper. "Since the recall feature is effective
only in periods of constrained firm transportation demand in
northern California, the Commission believes that the recall
feature should be exercised only if firm capacity is not available
for a shipper to northern California on El Paso or on any other
pipeline available to the shipper," it said. "If such capacity is
not available, the shipper may request Block II capacity either
from [Dynegy] or from El Paso..."
FERC said "the recall should be exercised only if [Dynegy]
declines to release Block II capacity that it is not using for
service to California on terms acceptable to the shipper requesting
the release." If this occurs, "the shipper may demand that El Paso
recall the Block II capacity at a rate acceptable to both parties."
FERC also dismissed arguments that the posting of the three
contracts as a single transaction, rather than separately, amounted
to an illegal tying arrangement. It rejected protesters' claims
that the 72-hour notice given for interested parties to review the
transaction was insufficient. Given the "numerous opportunities to
purchase the capacity at issue, a complaint that the notice may
have been unclear, or the response period too short, rings hollow,"
the order said, adding that the posting conformed to the Gas
Industry Standards Board's requirements.